Description
The Walt Disney Company (DIS) is a diversified media company conducting operations in five segments – media networks, studio entertainment, theme parks and resorts, consumer products, and interactive media. The company produces a full range of different entertainment products, the principal items being motion pictures, television programs, musical recordings, books and magazines.
Disney owns the rights to some of the most famous films and studio works ever created, including Mickey Mouse and Winnie the Pooh. These characters, and others, are featured in several theme parks that Disney develops or licenses to third parties around the world. Disney also makes live-action and animated films under several labels, and owns ABC, Disney Channel and ESPN. It also owns a 42.5% stake in A&E Networks, The History Channel and Lifetime Networks. Its films are registered under a number of labels and published by the above-mentioned networks, among others. Disney Channels are available in more than 100 countries.
In terms of revenue, media generates about 45% of the revenue, theme parks and resorts about 31%, studio activity about 13%, and consumer products, including interactive media, about 10%. 25% of sales are generated outside the United States, and this is expected to grow exponentially as the company is set to open its first theme park in Shanghai, China in 2016 through a joint venture with a government operator.
Within the media universe, Walt Disney is a unique investment opportunity. It offers an outstanding cyclical and secular growth opportunity driven by a combination of margin expansion and revenue growth. Furthermore, the company is able to launch new products and theme parks on a regular basis. Each successful new addition is a valuable asset for Disney as it can exploit the content for decades.
The backbone of Disney is the media networks. ESPN accounts for about ¾ of the network sales. The network has been able to pass on much of the ever increasing broadcasting rights to the subscribers. However, although the company loses money broadcasting the actual games; recurring revenues are generated from hours of NFL-related programming. The ongoing retransmission of sports events generates customer loyalty, and therefore audience, and finally publicity revenues.
Successful box office films often generate immediate revenues of USD 1.2 to 1.5 billion. Because overall operating margins are currently solid, Disney can digest a poor release in its movie business, which it will need to do with the movie “The Lone Ranger”, which is expected to be written-down to the tune of USD 180 million.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- The business exposure of the Parks and Resorts segment means that DIS’ business is considered to be late-cyclical,
- The Pixar studio, which launches popular animated films, belongs to DIS,
- Making animated videos is a “winner takes it all” business,
- Disney has an important library of films, which is the company’s most valuable asset, and generates significant recurring revenues,
- The Theme Parks are in a unique class compared with the other businesses in the portfolio. It is almost impossible to achieve the same level of consumer awareness for one particular product in this segment.
Weaknesses:
- The competition is entering the market offering cheaper rental movies,
- The technology required to produce animated films is expensive and needs to be renewed more frequently than average movie technology,
- The success of Pixar depends on one single person: John Lasseter,
- The smallest business unit (the interactive media group) is a loss making division. How long will Disney support this?
- Some Disney products can be thought of as consumer staples, and hence evolve in line with consumer sentiment and payrolls.